It looks like the entire mainstream media is jumping on the debt crisis bandwagon, not just ‘alternative’ media like Zerohedge anymore. From Yahoo (republished from Bloomberg), US Interest Burden Hits 28-Year High, Escalating Political Risk:
The Treasury spent $882 billion on net interest payments in the fiscal year through September — an average of roughly $2.4 billion a day, according to data the department released Friday. The cost was the equivalent of 3.06% as a share of gross domestic product, the highest ratio since 1996.
Historically high budget deficits, which caused total debt outstanding to soar in recent years, are a key reason for the increase. Those deficits reflect a steady rise in spending on Social Security and Medicare, as well as the extraordinary spending the US unleashed to battle Covid and constraints on revenue from sweeping 2017 tax cuts. Another big driver: the inflation-driven surge in interest rates.
Here is what it looks like. Relative to the size of the debt or GDP, interest has increased to near-historic highs:
As an investor, here is why I am not concerned:
1. Pundits have made these doom and gloom forecasts about the debt forever. There are headlines from decades ago warning of a debt crisis.
2. As the U.S. economy keeps growing, each successive trillion dollars of debt or interest paid on debt becomes smaller relatively speaking.
3. The 1980s-90s saw a period of strong economic growth despite rising debt relative to GDP. Treasury bonds also did well. Anyone who bet against the stock market in expectation of a debt crisis lost money. Same for 2008-2024. The U.S. only solidified its global dominance during this period despite rising national debt.
4. Investors do not need to worry much. Despite rising debt post-Covid and from 2008-2020, the S&P 500 and Nasdaq have consistently posted real returns in excess of 15-25% annually. Corporations can adjust to inflation by simply raising prices, so profits rise accordingly, as do wages. (Whether wages lag inflation or precede inflation is debated.) Inflation has the effect of shifting everything by the y-axis, much like in algebra.
5. So what? Let’s assume you believe the debt situation is a crisis or will soon be a crisis, then what? Gold will not necessarily be the answer. The evidence still points to stocks as the best hedge.
Treasury bills or cash can also work as a hedge, but you run into the problem of the fed suddenly cutting interest rates, like during the early ’90s, 2001-2003, or from 2019-2020. This will cause the coupons on subsequent bills to shrink rapidly, and at the same time assets such as stocks and real estate will surge, and long-term bond yields will fall, so you miss out on all of that. You’re stuck with bonds that may have a negative real yield. Or cash that does nothing, and at the same time everything is 20-40% more expensive. Sitting on the sidelines not uncommonly means having to scramble to buy back in at a much higher price as the awaited pullback never comes.
This is the conundrum when it comes to ‘the economy’ vs. ‘the stock market’. Profits and earnings the the only things that matter when it comes to stocks (and to a lesser extent, tax policy), whereas the state or health U.S. economy has many more variables, such as GDP, labor market, population growth, productivity, debt, inflation, and so on. The stock market, being that it’s composed of firms, is correlated but not the same as the economy, as I explain in the article Why Declining Population Growth and Sluggish GDP Growth are Not a Concern for Investors.
Public companies must return profits to shareholders, whether in the form of dividends, buybacks, or retained shareholder equity. So a public company with 20% profit margins, in theory, can yield a 15% real return for investors long-term vs. 5% inflation or 5% GDP growth. This explains how the stock market can still post strong real returns for investors despite a lot of things seemingly being wrong with the economy or society.